Norway-headquartered specialist asset manager SKAGEN Funds has released its annual report, revealing ongoing confidence in global equity markets underpinned by strong company balance sheets, ‘modest’ valuations of emerging market equities, and increasing value in large multinationals.

SKAGEN said the financial crisis has led to companies building up large cash holdings, which combined with cheap financing provides “significant scope” for consolidation activity. Also, private equity funds are well resourced once again, and actively seeking acquisition opportunities.

Despite recent strong performance, SKAGEN argues that emerging markets are valued at only 5% above their average since 1992, without taking into account diminishing political risk, stronger corporate governance and increasingly shareholder-friendly dividend policies.

In addition, SKAGEN said that whilst emerging markets currently account for 14% of the MSCI All Country World index, if the index was adjusted for all stocks and not only those freely trading in the markets then the emerging markets share would increase to 30%, leaving global equity funds underweight.

Weak performance over the last decade has uncovered "exceptional value" in large multi-nationals, SKAGEN said. “Under appreciated” global distribution networks, stronger balance sheets, generous dividends and significant economies of scale in infrastructure, marketing, manufacturing and product development have all led to companies such as Microsoft, Citigroup, China Telecom and Gazprom playing key roles in the asset manager’s portfolios.

Investment director and lead manager of SKAGEN Global Kristian Falnes said equities are only moderately priced relative to their history, low priced relative to interest rate levels and dividend payments, as well as having good earnings prospects.

“Combined with cash rich balance sheets and the potential acquisition activity this may stimulate, we remain confident about prospects for global equity markets. There are also some opportunities for those looking for unpopular, under-researched and undervalued companies. The market at present offers some real opportunities for stock pickers with a value focus,” Falnes said.

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